Bank stocks mixed after RBI’s latest rate hike

Union Bank of India (up 1.60%), Bank of Baroda (up 0.80%), State Bank of India (up 0.43%), IndusInd Bank (up 0.59%), Yes Bank (up 0.23%), ICICI Bank (up 0.25%) and Punjab National Bank (up 0.12%), edged higher.

Axis Bank (down 0.11%), Canara Bank (down 0.11%), Bank of India (down 0.32%), Federal Bank (down 0.74%), HDFC Bank (down 0.78%), Kotak Mahindra Bank (down 1.23%) and IDBI Bank (down 1.42%), edged lower.

The BSE Bankex was down 0.07% at 11,054.71. It underperformed the Sensex, which was up 0.58% at 16,974.36.

The Reserve Bank of India (RBI) hiked the repo rate–the short-term rate at which the RBI lends cash to banks–by 25 basis points to 8.25%, at its mid-quarter monetary policy review today, 16 September 2011. The RBI kept cash reserve ratio (CRR), the percentage of banks’ deposits which they must keep with the central bank, unchanged at 6%.

This is the twelfth time since March 2010 that the RBI has raised interest rates. The rate hike comes in a bid to tame inflation which is at elevated levels.

Today’s rate hike was on expected lines. Eleven out of twelve economists polled by Capital Market had expected a 25 basis points (bps) hike in repo rate, the key short-term policy interest, from the RBI at its mid-quarter policy review today, 16 September 2011.

The RBI today, 16 September 2011, said the year-on-year non-food credit growth at 20.1% in August 2011 was above the indicative projection of 18% cent set out in the July policy review.

The central bank said it is imperative to persist with the current anti-inflationary stance, adding that a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions.

In recent weeks, as a result of global risk aversion, the rupee has depreciated, which may have adverse implications for inflation, the RBI said. Inflation remains high, generalised and much above the comfort zone of the Reserve Bank of India, it said. The central bank said that today’s (16 September 2011) repo rate hike is expected to reinforce the impact of past policy actions to contain inflation and anchor inflationary expectations. As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12, RBI said.

Going forward, the stance of the monetary will be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments, RBI said.

Although India’s exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand, RBI said. This, combined with the slowing down of domestic demand, to which the monetary policy stance is also contributing, suggests that risks to the growth projection for 2011-12 made in the July 2011 monetary policy review are on the downside, RBI said.

Corporate margins in Q1 June 2011 moderated across several sectors compared to levels in Q4 March 2011. However, barring a few sectors, significant pass-through of rising input costs is still visible, RBI said.

The central government’s fiscal imbalances widened during April-July of 2011 reflecting, primarily, the impact of decline in revenue receipts coupled with pressures from non-plan revenue expenditures on account of higher petroleum and fertiliser subsidies. Fiscal deficit at 55.4% of the budget estimates in the first four months of the current fiscal was significantly higher than that of 42.5% during the corresponding period last year (when adjusted for the more than budgeted spectrum proceeds).


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